Trust stimulates the economy.
There is a superb reason why financial statements should be audited by an external auditor: since it creates trust.
Sustainability and environmental, social and governance (ESG) reporting can be subject to external audit to extend trust. 91 percent of the 1,400 firms in 22 jurisdictions report some level of sustainability information and 51 percent provide some level of assurance. This is in keeping with “The state of affairs in ensuring sustainability“, a recent report from the International Federation of Accountants (IFAC) and the Association of International Certified Professional Accountants.
The query is: How can ESG assurance create trust in ESG disclosures when external auditing, probably the most advanced type of assurance, struggles with a trust deficit? Or will ESG assurance repeat the identical mistakes and turn out to be old wine in recent bottles?
It was not way back that, amid a spate of corporate scandals, he made it official: “Regulators, investors and the general public have lost confidence in the audit market.” It was not the primary time such audit-related statements were made, and it probably won’t be the last. But for ESG assurance, many should not only seeking to traditional accounting firms but additionally looking for the needed verifications.
This implies that while engaging non-traditional assurance providers is an excellent step, it might not be enough. After all, external assurance involves most of the same stakeholders as external audit – equivalent to reporting firms and investors – and sustainability and ESG investing already face heavy criticism for alleged greenwashing. To avoid a repeat of the crisis of confidence in external audit, ESG assurance must due to this fact take a special path.
Unlike accounting and auditing matters, ESG issues are diverse. Disclosure and representation are largely voluntary and supply an important deal of flexibility. An organization with different sustainability topics and multiple locations can select the topics and regions on which it reports. In fact, some firms may select to not report on certain criteria or locations. Nevertheless, sustainability reporting on the local level is crucial.
The Sustainability Governance Scorecard 2020 covers the sustainability leaders represented in a number of sustainability indices in 10 sectors and 7 countries. The integrated report on Coca-Cola İçecek (CCI) is a useful example of sustainability reporting in practice. CCI produces, distributes and sells carbonated and still beverages constructed from Coca-Cola products to Azerbaijan, Iraq, Jordan, Kazakhstan, Kyrgyzstan, Pakistan, Syria, Tajikistan, Turkmenistan, Uzbekistan and Turkey, where the corporate is predicated. The company is listed on the Istanbul Stock Exchange and reports its sustainability results individually for every country during which it operates. Between 2011 and 2020, CCI obtained, amongst other things, external confirmation of its water and energy consumption.
The 2020 report and former CCI sustainability reports discuss with different frameworks and standards, equivalent to the Global Reporting Initiative, the United Nations Global Compact and the United Nations Women Empowerment Program, AA1000, ISAE 3000, etc. Auditor reports typically give “limited certainty” and state that there isn’t any evidence that the knowledge chosen is just not presented in all material respects “in accordance with the reporting criteria developed internally by CCI”.
An external audit differs from sustainability assurance. There isn’t any selection: the reporting criteria are final and binding. CCI’s 2020 audit report clearly states that the consolidated financial statements were prepared in accordance with the Turkish Capital Markets Committee’s accounting standards. It certifies that the audit was conducted in accordance with applicable auditing standards and that the consolidated financial information is “fairly presented in all material respects.”
Robust global standards are needed to make ESG and sustainability reports comparable inside and across jurisdictions. Unfortunately, the event of such standards has taken almost a generation, and there isn’t any end in sight. The first GRI guidelines were published in 2000 and set the framework for sustainability reporting. In 2004, the Association of Chartered Certified Accountants (ACCA) report “The Future of Sustainability Assurance” highlighted the necessity for “a complementary set of Generally Accepted Accounting Principles for Sustainability (GAAPS) and Generally Accepted Assurance Standards for Sustainability (GAASS).” ” Fast forward to 2021 and we’ve got seen the emergence of the International Sustainability Standards Board (ISSB) and there remains to be lots to do.
We at SustainFinance imagine that the present moment is a singular opportunity to get ESG assurance heading in the right direction. As it evolves and catches up with external auditing, ESG assurance must complete the next 4 tasks to avoid making a trust deficit equivalent to is now occurring with external auditing.
1. ESG assurance must maintain its independence.
The consensus is evident: independence is the cornerstone of external security. But the audit practice has created its own concept of independence, which is just not so intuitive. Can the auditor really be independent of the corporate that appoints him, pays him, refers business to him and possibly fires him? The obvious answer: Not really. Of course, the auditor’s answer has long been: Why not?
2. ESG assurance must transcend offering standard audit-like opinions.
In audit practice through the global financial crisis (GFC), it took a really very long time to get a discussion of key audit issues within the auditor’s report. ESG assurance providers would do well to supply prompt commentary on key assurance topics.
3. ESG assurance must require management to face by its sustainability reports.
These reports should be accompanied by a self-certification letter signed by the CEO and applicable board committee members stating that the report comprises the fabric truth, the entire truth and nothing but the reality.
4. ESG insurance providers ought to be ready and willing to undergo regulatory oversight.
Unlike external audits, ESG assurance doesn’t should undergo the lengthy and failed experiment of self-regulation. When stakeholders ask who audits the auditor, those offering ESG assurance should respond with an independent regulator, which will be the same as the present audit regulator.
In short, to construct sustainable trust – an ambitious task in any context – ESG assurance must replicate the knowledge and experience of external auditors while avoiding their pitfalls.
If you enjoyed this post, do not forget to subscribe.
Photo credit: ©Getty Images / undefined undefined
